New Economics Papers
on Banking
Issue of 2010‒04‒17
47 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Corporate Governance in the Swedish Banking Sector By Palmberg, Johanna
  2. Does Trade Credit Provides Favorable Information to Banks? Evidence from Japan By Takanori Tanaka
  3. Branching Deregulation and Merger Optimality By Ana Lozano-Vivas; Miguel A. Meléndez-Jímenez; Antonio J. Morales
  4. Competition, Risk-Shifting, and Public Bail-out Policies By Reint Gropp; Hendrik Hakenes; Isabel Schnabel
  5. Information technology and banking organization By Sauro Mocetti; Marcello Pagnini; Enrico Sette
  6. A Macroprudential Framework for the Early Detection of Banking Problems in Emerging Economies By Loser, Claudio M.; Kiguel, Miguel A.; Mermelstein, David
  7. The pricing of government-guaranteed bank bonds By Aviram Levy; Andrea Zaghini
  8. Bad Bank(s) and Recapitalization of the Banking Sector By Schäfer, Dorothea; Zimmermann, Klaus F.
  9. Return from retail banking and payments By Hasan , Iftekhar; Schmiedel , Heiko; Song, Liang
  10. A Macroprudential Framework for Monitoring and Examining Financial Soundness By Schou-Zibell, Lotte; Albert, Jose Ramon; Song, Lei Lei
  11. Contagion in Banking Crises: A Spatial Probit Model By Andrea Amaral; Margarida Abreu; and Victor Mendes
  12. Do banks propagate debt market shocks? By Galina Hale; João A. C. Santos
  13. Banking and Financial Crises in United States History: What Guidance can History Offer Policymakers? By Tallman, Ellis W; Wicker, Elmus R.
  14. Does monetary policy affect bank risk-taking? By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  15. A revenue-based frontier measure of banking competition By Santiago Carbó; David Humphrey; Francisco Rodríguez
  16. Whom to Merge with? A Tale of the Spanish Banking Deregulation Process By Ana Lozano-Vivas; Miguel A. Meléndez-Jímenez; Antonio J. Morales
  17. What do premiums paid for bank M&As reflect? the case of the European Union By Jens Hagendorff; Ignacio Hernando; Maria J. Nieto; Larry D. Wall
  18. The Transatlantic Banking Crisis: Lessons and EU Reforms By Welfens, Paul J. J.
  19. The changing nature of financial intermediation and the financial crisis of 2007-09 By Tobias Adrian; Hyun Song Shin
  20. The bank lending channel revisited By Piti Disyatat
  21. Cross-border bank M&As and risk: evidence from the bond market By Choi , Sungho; Francis , Bill B; Hasan, Iftekhar
  22. "Cream-skimming" in subprime mortgage securitizations : which subprime mortgage loans were sold by depository institutions prior to the crisis of 2007? By Paul Calem; Christopher Henderson; Jonathan Liles
  23. Optimal Regulation of Bank Capital and Liquidity: How to Calibrate New International Standards By Ray Barrell; E Philip Davis; Tatiana Fic; Dawn Holland; Simon Kirby; Iana Liadze
  24. Exposure at Default Model for Contingent Credit Line By Bag, Pinaki
  25. Discriminatory fees, coordination and investment in shared ATM networks By Stijn FERRARI
  26. The information revolution and small business lending: the missing evidence By Robert DeYoung; W. Scott Frame; Dennis Glennon; Peter Nigro
  27. Information Asymmetry in Pricing of Credit Derivatives By Caroline Hillairet; Ying Jiao
  28. An analysis of the determinants of credit default swap spread changes before and during the subprime financial turmoil By Antonio Di Cesare; Giovanni Guazzarotti
  29. Precautionary Measures for Credit Risk Management in Jump Models By Masahiko Egami; Kazutoshi Yamazaki
  30. Financial safety nets, bailouts and moral hazard By Jaime Hurtubia Torres; Claudio Sardoni
  31. EFR 2009-01 A factor analysis approach to measuring European loan and bond market integration By Wagenvoort, Rien; Ebner, André; Morgese Borys, Magdalena
  32. When the rivers run dry : liquidity and the use of wholesale funds in the transmission of the U.S. subprime crisis By Raddatz, Claudio
  33. Capital Structure, Risk and Asymmetric Information: Theory and Evidence By M. V. Ibrahimo; C. P. Barros
  34. Securitized Products, Financial Regulation, and Systemic Risk By Fujii, Mariko
  35. Safe and sound banking : a role for countercyclical regulatory requirements ? By Caprio, Gerard, Jr.
  36. A microeconometric investigation into bank interest rate rigidity By Ben R Craig; Valeriya Dinger
  37. Asymmetric Information and Bank Runs By Chao Gu
  38. New Monetarist Economics: methods By Stephen D. Williamson; Randall Wright
  39. Measuring systemic risk By Viral V. Acharya; Lasse H. Pedersen; Thomas Philippon; Matthew Richardson
  40. Relevance of Risk Capital and Margining for the Valuation of Power Plants: Cash Requirements for Credit Risk Mitigation By Lang, Joachim; Madlener, Reinhard
  41. Sovereign Defaults, Domestic Credit Market Institutions and Credit to the Private Sector By Guido Sandleris
  42. Bank Bail-Outs, International Linkages and Cooperation By Friederike Niepmann; Tim Schmidt-Eisenlohr
  43. How large has the federal financial safety net become? By Nadezhda Malysheva; John R. Walter
  44. The Shanxi Banks By Randall Morck; Fan Yang
  45. Funding Liquidity Risk and Deviations from Interest-Rate Parity During the Financial Crisis of 2007-2009 By Cho-Hoi Hui; Hans Genberg; Tsz-Kin Chung
  46. Bank-Lending Standards, the Cost Channel and Inflation Dynamics By Sylvia Kaufmann; Johann Scharler
  47. Debt overhang and credit risk in a business cycle model By Filippo Occhino; Andrea Pescatori

  1. By: Palmberg, Johanna (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper studies the corporate governance structure among Swedish banks. Who controls the Swedish banks and what characteristics does the Swedish banking sector have? Issues related to corporate governance such as ownership structure, board of directors and control-enhancing mechanisms will be studied. The Swedish banking law, how Swedish banks handled the financial crises and government measures to deal with the financial crisis is also analyzed.
    Keywords: banking; Sweden; ownership; corporate governance
    JEL: D02 G32
    Date: 2010–04–10
  2. By: Takanori Tanaka (Institute of Social and Economic Research, Osaka University)
    Abstract: This paper examines whether trade credit as a credible signal about firmfs creditworthiness to banks facilitates provision of bank credit to the firms receiving trade credit. Using data on Japanese manufacturing firms over the period 1990-1995, we find that firms receiving trade credit are provided short-term credit by less-informed banks. Consequently, in the firms that have armfs-length relations with banks, trade credit plays an important role in mitigating asymmetric information problems between firms and banks, thereby facilitating extension of bank credit.
    Keywords: Trade Credit; Bank Credit
    JEL: G32
    Date: 2009–07
  3. By: Ana Lozano-Vivas (Department of Economic Theory, Universidad de Málaga); Miguel A. Meléndez-Jímenez (Department of Economic Theory, Universidad de Málaga); Antonio J. Morales (Department of Economic Theory, Universidad de Málaga)
    Abstract: The U.S. banking industry has been characterized by intense merger activity in the absence of economies of scale and scope. We claim that the loosening of geographic constraints on U.S. banks is responsible for this consolidation process, irrespective of value-maximizing motives. We demonstrate this by putting forward a theoretical model of banking competition and studying banks’ strategic responses to geographic deregulation. We show that even in the absence of economies of scale and scope, bank mergers represent an optimal response. Also, we show that the consolidation process is characterized by merger waves and that some equilibrium mergers are not profitable per se -they yield losses- but become profitable as the waves of mergers unfold.
    Keywords: Banking Competition, Deregulation, Mergers
    JEL: C72 G21 G28 L13 L41 L51
    Date: 2010–03
  4. By: Reint Gropp (Department of Finance, Accounting and Real Estate, European Buisness School, Germany); Hendrik Hakenes (Institut für Finanzmarkttheorie, Leibniz Universität Hannover, Germany); Isabel Schnabel (Chair of Financial Economics, Johannes Gutenberg-Universität Mainz, Germany)
    Abstract: This paper empirically investigates the effect of government bail-out policies on banks outside the safety net. We construct a measure of bail-out perceptions by using rating information. From there, we construct the market shares of insured competitor banks for any given bank, and analyze the impact of this variable on banks’ risk-taking behavior, using a large sample of banks from OECD countries. Our results suggest that government guarantees strongly increase the risk-taking of competitor banks. In contrast, there is no evidence that public guarantees increase the protected banks’ risk-taking, except for banks that have outright public ownership. These results have important implications for the effects of the recent wave of bank bail-outs on banks’ risk-taking behavior.
    Keywords: Government bail-out, implicit and explicit government guarantees, banking competition, risk-taking
    JEL: G21 G28 L53
    Date: 2010–01–14
  5. By: Sauro Mocetti (Bank of Italy); Marcello Pagnini (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: We investigate the impact of information and communication technologies (ICT) on local loan officersÂ’ autonomy in small business lending. We derive a simple agency model of the interaction between a local branch manager and the headquarters, which yields an estimable equation for the optimal delegation of authority. Using a unique and specifically tailored dataset including about 300 Italian banks, we show that banks equipped with more ICT capital and resorting to credit scoring delegate more decision-making power to their local branch managers. These results are robust to many additional controls, including instrumental variable estimation. The effects on decentralization are strengthened for those banks that jointly hold higher ICT capital endowments and adopt credit scoring.
    Keywords: ICT, credit scoring, delegation, banking organization, local branch manager, small business lending
    JEL: L22 M54 O33
    Date: 2010–03
  6. By: Loser, Claudio M. (Centennial Group); Kiguel, Miguel A. (Centennial Group); Mermelstein, David (Centennial Group)
    Abstract: This paper develops an analytical framework that can be used to anticipate problems in the banking system and enable supervisors to take mitigating actions at an early stage. <p> This paper has two components. First, it develops an early warning indicator that is intended to capture a number of the systemic risks that can affect the banking system as a whole. Second, it develops a methodology to detect problems at the individual bank level in an effort to identify those firms with financial vulnerabilities. <p> For the systemic component of our methodology, the final output is a banking system vulnerability index to facilitate bank monitoring tasks, as well as some disaggregated subcomponents that are intended to display the relative importance of the different risks (e.g., liquidity, currency, and interest rate risks). Regarding the assessment of the soundness of individual institutions, the paper uses a methodology based on cluster analysis that incorporates the results of the previous framework. <p> There is an empirical application of the systemic component that is based on the 2001 Argentine banking crisis. It shows that the proposed vulnerability indicator started to increase steadily beginning in 1999, following 2 years in which it had remained flat, and it finally peaked in mid-2001, which was just before the onset of the crisis.
    Keywords: Banks; stress testing; banking crises; banking regulation; banking supervision; early warning systems
    JEL: E44 E58 E65 G21 G28
    Date: 2010–03–01
  7. By: Aviram Levy (Bank of Italy); Andrea Zaghini (Bank of Italy)
    Abstract: We examine the effects of the government guarantee schemes for bank bonds adopted in the aftermath of the Lehman Brothers demise to help banks retain access to wholesale funding. We describe the evolution and the pattern of bond issuance across countries to assess the effect of the schemes. Then we propose an econometric analysis of one striking feature of this new market, namely the significant “tiering” of the spreads paid by banks at issuance, finding that they mainly reflect the characteristics of the guarantor (credit risk, size of rescue measures, timeliness of repayments) and not those of the issuing bank or of the bond itself.
    Keywords: banks, corporate bonds, financial crisis, government guarantees
    JEL: G12 G18 G21 G28 G32
    Date: 2010–03
  8. By: Schäfer, Dorothea (DIW Berlin); Zimmermann, Klaus F. (IZA, DIW Berlin and Bonn University)
    Abstract: With banking sectors worldwide still suffering from the effects of the financial crisis, public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a publicly sponsored work-out unit, a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value – assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets’ current book value and their market value. Under the plan, the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake in it. In extreme cases, this would mean a takeover of the bank by the government. The risk to taxpayers from this investment would be acceptable, however, once the banks are freed from toxic assets. A clear emphasis that the government stake is temporary would also be necessary. The government would cover the bad bank’s losses, while profits would be distributed to the distressed bank’s current shareholders. The plan is viable independent of whether the government decides to have one centralized bad bank or to establish a separate bad bank for each systemically relevant banking institute. Under the terms of the plan, bad banks and nationalization are not alternatives but rather two sides of the same coin. This plan effectively addresses three key challenges. It provides for the transparent removal of toxic assets and gives the banks a fresh start. At the same time, it offers the chance to keep the cost to taxpayers low. In addition, the risk of moral hazard is curtailed. The comparison of the proposed design with the bad bank plan of the German government reveals some shortcomings of the latter plan that may threaten the achievement of these key issues.
    Keywords: financial crisis, financial regulation, toxic assets, bad bank
    JEL: G20 G24 G28
    Date: 2009–06
  9. By: Hasan , Iftekhar (The Lally School of Management and Technology of Rensselaer Polytechnic Institute, USA and Bank of Finland); Schmiedel , Heiko; Song, Liang
    Abstract: The European banking industry joined forces to achieve a fully integrated market for retail payment services in the euro area: the Single Euro Payments Area (SEPA). Against this background, the present paper examines the fundamental relationship between retail payment business and overall bank performance. Using data from across 27 European markets over the period 2000–2007, we analyse whether the provisions of retail payment services are reflected in improved bank performance, using accounting ratios and efficiency measures. The results confirm that banks perform better in countries where the retail payment service markets are more highly developed, and the relationship is stronger in countries with a relatively high adoption of retail payment transaction technologies. Retail payment transaction technology can itself also improve bank performance, and statistical evidence shows that heterogeneity in retail payment instruments is associated with enhanced bank performance. Similarly, a higher usage of electronic retail payment instruments seems to stimulate banking business. We also show that retail payment services have a more significant impact on savings and cooperative bank performance, although they do also have a positive influence on the performance of commercial banks. Additionally, our findings reveal that the impact of retail services on bank performance is dominated by fee income. Finally, an effective payment service market is found to be associated with higher bank stability. Our findings are robust to different regression specifications. The results may also be informative for the industry when reconsidering its business models in the light of current financial market developments.
    Keywords: retail payment; bank performance; cost and profit efficiency
    JEL: G21 G28
    Date: 2010–02–21
  10. By: Schou-Zibell, Lotte (Asian Development Bank); Albert, Jose Ramon (Philippine Institute for Development Studies); Song, Lei Lei (Asian Development Bank)
    Abstract: This paper describes concepts and tools behind macroprudential monitoring, and the growing importance of macroprudential tools for assessing the stability of financial systems. This paper also employs a macroprudential approach in examining financial soundness and identifying its determinants. Using data from selected developing economies in Asia, South America, and Europe, as well as selected economies from the developed world, panel regressions are estimated to quantify the impacts of the major influences on key financial soundness indicators, including capital adequacy, asset quality, and earnings and profitability.
    Keywords: Macroprudential; banks; banking crises; banking regulation; banking supervision; stress testing; early warning system
    JEL: E44 E58 E65 G21 G28
    Date: 2010–03–01
  11. By: Andrea Amaral; Margarida Abreu; and Victor Mendes
    Abstract: We use a spatial Probit model to study banking crises and show that the probability of a systemic banking crisis depends on contagion and that this effect may result from business connections between institutions or from similarities between banking systems.
    Keywords: Spatial Probit, banking crises, contagion.
    JEL: C21 C25 G21
    Date: 2010–01
  12. By: Galina Hale; João A. C. Santos
    Abstract: Over the years, U.S. banks have increasingly relied on the bond market to finance their business. This created the potential for a link between the bond market and the corporate sector whereby borrowers, including those that do not rely on bond funding, became exposed to the conditions in the bond market. We investigate the importance of this link. Our results show that when the cost to access the bond market goes up, banks that rely on bond financing charge higher interest rates on their loans. Banks that rely exclusively on deposit funding follow bond financing banks and increase the interest rates on their loans, though by smaller amounts. Further, banks pass the bond market shocks predominantly to their risky borrowers that have access to the bond market and to their borrowers that do not have access to the bond market. These results show that banks propagate shocks to the bond market by passing them through their loan policies to their borrowers, including those that do not use bond financing.
    Keywords: Banks and banking ; Banks and banking - Costs ; Bond market
    Date: 2010
  13. By: Tallman, Ellis W; Wicker, Elmus R.
    Abstract: This paper assesses the validity of comparisons of the current financial crisis with past crises in the United States. We highlight aspects of two National Banking Era crises (the Panic of 1873 and the Panic of 1907) that are relevant for comparison with the Panic of 2008. In 1873, overinvestment in railroad debt and the default of railroad companies on that debt led to the failure of numerous brokerage houses, an antecedent to the modern investment bank. For the Panic of 1907, panic-related deposit withdrawals centered on the less regulated trust companies, which were less directly linked to the existing lender of last resort, similar to investment banks in 2008. The popular press has made numerous references to the banking crises (there were three main ones) of the Great Depression as relevant comparisons to the present crisis. This paper argues that such an analogy is inaccurate in general.
    Keywords: Systemic Risk; Financial Crises; Bank Failures
    JEL: N22 E44 N21
    Date: 2009–07–31
  14. By: Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
    Abstract: This paper investigates the relationship between short-term interest rates and bank risk. Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed to an increase in banks' risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls.
    Keywords: bank risk, monetary policy, credit crisis
    Date: 2010–03
  15. By: Santiago Carbó; David Humphrey; Francisco Rodríguez
    Abstract: Measuring banking competition using the HHI, Lerner index, or H-statistic can give conflicting results. Borrowing from frontier analysis, the authors provide an alternative approach and apply it to Spain over 1992-2005. Controlling for differences in asset composition, productivity, scale economies, risk, and business cycle influences, they find no differences in competition between commercial and savings banks nor between large and small institutions, but the authors conclude that competition weakened after 2000. This appears related to strong loan demand where real loan-deposit rate spreads rose and fees were stable for activities where scale economies should have been realized.
    Keywords: Bank competition
    Date: 2010
  16. By: Ana Lozano-Vivas (Department of Economic Theory, Universidad de Málaga); Miguel A. Meléndez-Jímenez (Department of Economic Theory, Universidad de Málaga); Antonio J. Morales (Department of Economic Theory, Universidad de Málaga)
    Abstract: We put forward a simple spatial competition model to study banks’ strategic responses to the Spanish asymmetric geographic deregulation. We find that once geographic deregulation process finishes, inter-regional mergers between the savings banks are optimal. We claim that the public good nature of the merging activities together with the incentives provided by the deregulation process are the driving factors behind the equilibrium merger of the savings banks. It seems that the economic crisis will finally force regional politicians to allow inter-regional caja mergers, letting the consequences of the removal of geographic barriers in the 80’s come to a fruition with a delay of thirty years.
    Keywords: Banking Competition, Deregulation, Mergers
    JEL: C72 G21 G28 L13 L41 L51
    Date: 2010–03
  17. By: Jens Hagendorff; Ignacio Hernando; Maria J. Nieto; Larry D. Wall
    Abstract: We analyze the takeover premiums paid for a sample of European bank mergers between 1997 and 2007. We find that acquiring banks value profitable, high-growth, and low-risk targets. We also find that the strength of bank regulation and supervision and of deposit insurance regimes in Europe has measurable effects on takeover pricing. Stricter bank regulatory regimes and stronger deposit insurance schemes lower the takeover premiums paid by acquiring banks. This result, presumably in anticipation of higher compliance costs, is mainly driven by domestic deals. Also, we find no conclusive evidence that bidders seek to extract benefits from regulators either by paying a premium for deals in less regulated regimes or becoming too big to fail.
    Date: 2010
  18. By: Welfens, Paul J. J. (University of Wuppertal)
    Abstract: The key dynamics of the transatlantic banking crisis are analyzed – with emphasis on the fact that the banking disaster of 2007/08 was not really a surprise –, and the five key requirements for restoring stability and efficiency in the EU/OECD banking sector are highlighted. Most important, however, is the introduction of a new tax regime designed to encourage bankers to take a more long term time horizon in decision-making and to reduce excessive risk-taking. Banks and funds should be taxed not only on the basis of profits but also on the basis of the variability – read variance – of the rate of return on equity: the higher the variability over time the higher the tax to be paid. The quality and comprehensiveness of banks’ balance sheets must be radically improved and all off-balance sheet activities must be included in future total balance sheets. The medium term structure of employment in terms of the breakdown nontradables/tradables will have to adjust.
    Keywords: banking, financial market reforms, EU, globalization, USA
    JEL: E50 F01 F30
    Date: 2009–04
  19. By: Tobias Adrian; Hyun Song Shin
    Abstract: The financial crisis of 2007-09 highlighted the changing role of financial institutions and the growing importance of the "shadow banking system," which grew out of the securitization of assets and the integration of banking with capital market developments. This trend was most pronounced in the United States, but it also had a profound influence on the global financial system as a whole. In a market-based financial system, banking and capital market developments are inseparable, and funding conditions are tied closely to fluctuations in the leverage of market-based financial intermediaries. Balance-sheet growth of market-based financial intermediaries provides a window on liquidity by indicating the availability of credit, while contractions of balance sheets have tended to precede the onset of financial crises. We describe the changing nature of financial intermediation in the market-based financial system, chart the course of the recent financial crisis, and outline the policy responses that have been implemented by the Federal Reserve and other central banks.
    Keywords: Financial crises ; Intermediation (Finance) ; Liquidity (Economics) ; Monetary policy ; Capital market
    Date: 2010
  20. By: Piti Disyatat
    Abstract: A central proposition in research on the role that banks play in the transmission mechanism is that monetary policy imparts a direct impact on deposits and that deposits, insofar as they constitute the supply of loanable funds, act as the driving force of bank lending. This paper argues that the emphasis on policy-induced changes in deposits is misplaced. A reformulation of the bank lending channel is proposed that works primarily through the impact of monetary policy on banks' balance sheet strength and risk perception. Such a recasting implies, contrary to conventional wisdom, that greater reliance on market-based funding enhances the importance of the channel. The framework also shows how banks, depending on the strength of their balance sheets, could act either as absorbers or amplifiers of shocks originiating in the financial system.
    Keywords: systemic risk, Macroprudential regulation, Portfolio distress loss, Credit default swap, Dynamic conditional correlation
    Date: 2010–02
  21. By: Choi , Sungho (Rensselaer Polytechnic Institute); Francis , Bill B (Rensselaer Polytechnic Institute); Hasan, Iftekhar (Lally School of Management & Technology, Rensselaer Polytechnic Institute and Bank of Finland)
    Abstract: The impact of cross-border bank M&As on bank risk remains an open question. Though geographically diversifying bank M&As have the potential to reduce the risk of bank insolvency, they also have the potential to increase that risk due to the increase in risk-taking incentives for bank managers and stockholders following these transactions. This paper empirically investigates whether cross-border bank M&As increase or decrease the risk of acquiring banks as captured by changes in acquirers’ yield spreads. The paper also investigates how differences in the institutional environments between bidder and target countries affect changes in yield spreads following M&A announcements. The study finds that bondholders, in general, perceive cross-border bank M&As as risk-increasing activities, unlike domestic bank mergers. Specifically, on average, yield spreads increase by 4.13 basis points following the announcement of cross-border M&As. This study also finds that these yield spreads are significantly affected by the differences in investor-protection and deposit-insurance environments between the transacting countries. However, the study does not find that the regulatory and supervisory environment in the home countries of the transacting parties significantly affects the changes in yield spreads. The overall evidence suggests that regulators should judge the relative environment in both the home and the host countries in evaluating the associated risks of an active multinational financial institution and in setting the sufficiency of the banks’ reserve positions.
    Keywords: bank risk; cross-border; M&A; yield spreads
    JEL: F23 G14 G21 G34
    Date: 2010–02–21
  22. By: Paul Calem; Christopher Henderson; Jonathan Liles
    Abstract: Depository institutions may use information advantages along dimensions not observed or considered by outside parties to "cream-skim," meaning to transfer risk to naive, uninformed, or unconcerned investors through the sale or securitization process. This paper examines whether "cream-skimming" behavior was common practice in the subprime mortgage securitization market prior to its collapse in 2007. Using Home Mortgage Disclosure Act data merged with data on subprime loan delinquency by ZIP code, the authors examine the bank decision to sell (securitize) subprime mortgages originated in 2005 and 2006. They find that the likelihood of sale increases with risk along dimensions observable to banks but not likely observed or considered by investors. Thus, in the context of the subprime lending boom, the evidence supports the cream-skimming view.
    Keywords: Risk management ; Mortgage-backed securities ; Subprime market ; Fraud
    Date: 2010
  23. By: Ray Barrell (National Institute of Economic and Social Research); E Philip Davis (National Institute of Economic and Social Research and Brunel University); Tatiana Fic (National Institute of Economic and Social Research); Dawn Holland (National Institute of Economic and Social Research); Simon Kirby (National Institute of Economic and Social Research); Iana Liadze (National Institute of Economic and Social Research)
    Abstract: Raising capital adequacy standards and introducing binding liquidity requirements can have beneficial effects if they reduce the probability of a costly financial crisis, but may also reduce GDP by raising borrowing costs for households and companies. In this paper, we estimate both benefits and costs of raising capital and liquidity, with the benefits being in terms of reduction in the probability of banking crises, while the costs are defined in terms of the economic impact of higher spreads for bank customers. We note that both of these results are contrary to the Modigliani-Miller theorem of irrelevance of the debt-equity choice. The result shows a positive net benefit from regulatory tightening, for a range of 2-6 percentage points increase in capital and liquidity ratios, depending on underlying assumptions.
    Keywords: bank, capital, financial regulation, prudential policy, credit, lending
    Date: 2009–07
  24. By: Bag, Pinaki
    Abstract: In-spite of large volume of Contingent Credit Lines (CCL) in all commercial banks paucity of Exposure at Default (EAD) models, unsuitability of external data and inconsistent internal data with partial draw-down, has been a major challenge for risk managers as well as regulators for managing CCL portfolios. Current paper is an attempt to build an easy to implement, pragmatic and parsimonious yet accurate model to determine exposure distribution of a CCL portfolio. Each of the credit line in a portfolio is modeled as a portfolio of large number of option instrument which can be exercised by the borrower determining the level of usage. Using an algorithm similar to basic CreditRisk+ and Fourier Transforms we arrive at a portfolio level probability distribution of usage.
    Keywords: EAD; Basel II; Credit Risk; Contingent credit line (CCL)
    JEL: C13 G21 G20
    Date: 2010–04–01
  25. By: Stijn FERRARI
    Abstract: This paper empirically examines the effects of discriminatory fees on ATM investment and welfare, and considers the role of coordination in ATM investment between banks. Our main findings are that foreign fees tend to reduce ATM availability and (consumer) welfare, whereas surcharges positively affect ATM availability and the different welfare components when the consumers’ price elasticity is not too large. Second, an organization of the ATM market that contains some degree of coordination between the banks may be desirable from a welfare perspective. Finally, ATM availability is always higher when a social planner decides on discriminatory fees and ATM investment to maximize total welfare. This implies that there is underinvestment in ATMs, even in the presence of discriminatory fees.
    Date: 2009–12
  26. By: Robert DeYoung; W. Scott Frame; Dennis Glennon; Peter Nigro
    Abstract: This paper provides empirical confirmation for Petersen and Rajan's (2002) widely accepted conjecture that information technology was the primary driver of the observed increase in small business borrower-lender distances in the United States in recent years. Using a different data source for small business loans, we show that annual increases in borrower-lender distances were slow and steady prior to 1993 (the end point in Petersen and Rajan's data) but accelerated rapidly after that. Importantly, we are able to assign at least half of this acceleration to the adoption of credit scoring technologies by the lending banks. Our tests also reveal strong statistical associations between lending distances and borrower characteristics, lender characteristics, market conditions, regulatory constraints, moral hazard incentives, and principal-agent incentives.
    Date: 2010
  27. By: Caroline Hillairet (CMAP - Centre de Mathématiques Appliquées - CNRS : UMR7641 - Polytechnique - X); Ying Jiao (PMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris-Diderot - Paris VII)
    Abstract: We study the pricing of credit derivatives with asymmetric information. The managers have complete information on the value process of the firm and on the default threshold, while the investors on the market have only partial observations, especially about the default threshold. Different information structures are distinguished using the framework of enlargement of filtrations. We specify risk neutral probabilities and we evaluate default sensitive contingent claims in these cases.
    Date: 2010–02–17
  28. By: Antonio Di Cesare (Bank of Italy); Giovanni Guazzarotti (Bank of Italy)
    Abstract: This paper analyzes the determinants of credit default swap spread changes for a large sample of US non-financial companies over the period between January 2002 and March 2009. In our analysis we use variables that the literature has found have an impact on CDS spreads and, in order to account for possible non-linear effects, the theoretical CDS spreads predicted by the Merton model. We show that our set of variables is able to explain more than 50% of CDS spread variations both before and after July 2007, when the current financial turmoil began. We also document that since the onset of the crisis CDS spreads have become much more sensitive to the level of leverage while volatility has lost its importance. Using a principal component analysis we also show that since the beginning of the crisis CDS spread changes have been increasingly driven by a common factor, which cannot be explained by indicators of economic activity, uncertainty, and risk aversion.
    Keywords: credit default swaps, bond spreads, credit risk, Merton model
    JEL: G12 G13
    Date: 2010–03
  29. By: Masahiko Egami; Kazutoshi Yamazaki
    Abstract: Sustaining efficiency and stability by properly controlling the equity to asset ratio is one of the most important and difficult challenges in bank management. Due to unexpected and abrupt decline of asset values, a bank must closely monitor its net worth as well as market conditions, and one of its important concerns is when to raise more capital so as not to violate capital adequacy requirements. In this paper, we model the tradeoff between avoiding costs of delay and premature capital raising, and solve the corresponding optimal stopping problem. In order to model defaults in a bank's loan/credit business portfolios, we represent its net worth by appropriate Levy processes, and solve explicitly for the double exponential jump diffusion process. In particular, for the spectrally negative case, we generalize the formulation using the scale function, and obtain explicitly the optimal solutions for the exponential jump diffusion process.
    Date: 2010–04
  30. By: Jaime Hurtubia Torres; Claudio Sardoni (Department of Economics,Sapienza University of Rome)
    Abstract: The paper argues that policymakers bail out banks with financial problems to avoid the costs of financial repression. After financial liberalization and when risk is verifiable, in some circumstances policymakers can commit to policies that discipline banks ex-ante and ex-post, by providing bailout to conservative banks and threatening the takeover of risky banks. When these policies are time consistent, regulatory policies to deal with moral hazard ex-ante, like for example prudential regulation, become redundant and policymakers refrain from implementing them.
    JEL: G21 G28
    Date: 2010
  31. By: Wagenvoort, Rien (European Investment Bank, Economic and Financial Studies); Ebner, André (Munich Graduate School of Economics); Morgese Borys, Magdalena (University La Sapienza)
    Abstract: By using an existing and a new convergence measure, this paper assesses whether bank loan and bond interest rates are converging for the non-financial corporate sector across the euro area. Whilst we find evidence for complete bond market integration, the market for bank loans remains segmented, albeit to various degrees depending on the type and size of the loan. Factor analysis reveals that rates on large loans and small loans with long rate fixation periods have weakly converged in the sense that, up to a fixed effect, their evolution is driven by common factors only. In contrast, the price evolution of small loans with short rate fixation periods is still affected by country-specific dynamic factors. There are few signs that bank loan rates are becoming more uniform with time.
    Keywords: financial market integration; corporate loan; corporate bond; panel unit root test; factor analysis
    JEL: C12 C23 G12 G21
    Date: 2009–11–30
  32. By: Raddatz, Claudio
    Abstract: This paper provides systematic evidence of the role of banks'reliance on wholesale funding in the international transmission of the ongoing financial crisis. It conducts an event study to estimate the impact of the liquidity crunch of September 15, 2008, on the stock price returns of 662 individual banks across 44 countries, and tests whether differences in the abnormal returns observed around those events relate to these banks'ex-ante reliance on wholesale funding. Globally and within countries, banks that relied more heavily in non-deposit sources of funds experienced a significantly larger decline in stock returns even after controlling for other mechanisms. Within a country, the abnormal returns of banks with high wholesale dependence fell about 2 percent more than those of banks with low dependence during the three days following Lehman Brothers'bankruptcy. This large differential return suggests that liquidity played an important role in the transmission of the crisis.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,Financial Intermediation,Emerging Markets
    Date: 2010–02–01
  33. By: M. V. Ibrahimo; C. P. Barros
    Abstract: This paper proposes a principal-agent model between banks and firms with risk and asymmetric information. A mixed form of finance to firms is assumed. The capital structure of firms is a relevant cause for the final aggregate level of investment in the economy. In the model analyzed, there may be a separating equilibrium, which is not economically efficient, because aggregate investments fall short of the first-best level. Based on European firm-level data, an empirical model is presented which validates the result of the relevance of the capital structure of firms. The relative magnitude of equity in the capital structure makes a real difference to the profits obtained by firms in the economy.
    Keywords: Risk, asymmetric information, credit and capital structure.
    JEL: D81 D82 G21 G32
    Date: 2010–01
  34. By: Fujii, Mariko (Asian Development Bank Institute)
    Abstract: It is widely believed that the practice of securitization is one of the causes that led to the 2007–08 financial crisis. In this paper, I show that securitized products such as collateralized debt obligations (CDO) are particularly vulnerable to systematic risk and tend to show higher tail risk. These characteristics, in turn, are closely associated with joint failures and systemic risk. In order to achieve greater stability of the financial system, it is important to prevent the recurrence of the collapse of specific markets as this may lead to the collapse of other components of the financial system. From this perspective, the financial regulations that should be applied to these problematic financial products and their relation to possible systemic risks are discussed.
    Keywords: global financial crisis; systemic risk; cdos; financial regulation
    JEL: G11 G28
    Date: 2010–03–05
  35. By: Caprio, Gerard, Jr.
    Abstract: Most explanations of the crisis of 2007-2009 emphasize the role of the preceding boom in real estate and asset markets in a variety of advanced countries. As a result, an idea that is gaining support among various groups is how to make Basel II or any regulatory regime less pro-cyclical. This paper addresses the rationale for and likely contribution of such policies. Making provisioning (or capital) requirements countercyclical is one way potentially to address pro-cyclicality, and accordingly it looks at the efforts of the authorities in Spain and Colombia, two countries in which countercyclical provisioning has been tried, to see what the track record has been. As explained there, these experiments have been at best too recent and limited to put much weight on them, but they are much less favorable for supporting this practice than is commonly admitted. The paper then addresses concerns and implementation issues with countercyclical capital or provisioning requirements, including why their impact might be expected to be limited, and concludes with recommendations for developing country officials who want to learn how to make their financial systems less exposed to crises.
    Keywords: Banks&Banking Reform,Access to Finance,Financial Intermediation,Debt Markets,Emerging Markets
    Date: 2010–02–01
  36. By: Ben R Craig; Valeriya Dinger
    Abstract: Using a unique dataset of interest rates offered by a large sample of U.S. banks on various retail deposit and loan products, we explore the rigidity of bank retail interest rates. We study periods over which retail interest rates remain fixed ("spells") and document a large degree of lumpiness of retail interest rate adjustments as well as substantial variation in the duration of these spells, both across and within different products. To explore the sources of this variation we apply duration analysis and calculate the probability that a bank will change a given deposit or loan rate under various conditions. Consistent with a nonconvex adjustment costs theory, we find that the probability of a bank changing its retail rate is initially increasing with time. Then as heterogeneity of the sample overwhelms this effect, the hazard rate decreases with time. The duration of the spells is significantly affected by the accumulated change in money market interest rates since the last retail rate change, the size of the bank and its geographical scope.
    Keywords: Interest rates ; Bank deposits
    Date: 2010
  37. By: Chao Gu (Department of Economics, University of Missouri-Columbia)
    Abstract: In the existing literature, panic-based bank runs are triggered by a commonly acknowledged and observed sunspot signal. There are only two equilibrium realizations resulting from the commonly observed sunspot signal: Everyone runs or no one runs. I consider a more general and more realistic situation in which consumers observe noisy private sunspot signals. If the noise in the signals is sufficiently small, there exists a proper correlated equilibrium for some demand deposit contracts. A full bank run, a partial bank run (in which some consumers panic whereas others do not), or no bank run occurs, depending on the realization of the sunspot signals. If the probabilities of runs are small, the optimal demand deposit contract tolerates full and partial bank runs.
    Keywords: sunspot equilibrium, correlated equilibrium, imperfect coordination, imperfect information.
    JEL: D82 G21
    Date: 2010–02–11
  38. By: Stephen D. Williamson; Randall Wright
    Abstract: This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: New Monetarism has something in common with Old Monetarism, but there are also important differences; it has little in common with Keynesianism. We describe the principles of these schools and contrast them with our approach. To show how it works, in practice, we build a benchmark New Monetarist model, and use it to study several issues, including the cost of inflation, liquidity and asset trading. We also develop a new model of banking.
    Date: 2010
  39. By: Viral V. Acharya; Lasse H. Pedersen; Thomas Philippon; Matthew Richardson
    Abstract: We present a simple model of systemic risk and show how each financial institution’s contribution to systemic risk can be measured and priced. An institution’s contribution, denoted systemic expected shortfall (SES), is its propensity to be undercapitalized when the system as a whole is undercapitalized, which increases in its leverage, volatility, correlation, and tail-dependence. Institutions internalize their externality if they are “taxed” based on their SES. Through several examples, we demonstrate empirically the ability of components of SES to predict emerging systemic risk during the nancial crisis of 2007-2009.
    Keywords: Systemic risk ; Risk
    Date: 2010
  40. By: Lang, Joachim (E.ON AG, Controlling / Corporate Planning); Madlener, Reinhard (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))
    Abstract: In the electricity sector, most of the trades are still done in the OTC market without direct mitigation of credit risk. Newer discussions fuelled by the European Commission (EUCOM 2009a,b) show that there is a political will to enforce a stronger collateralization policy on all European derivatives markets, including the OTC markets. This is meant to secure the markets and prohibit arbitrage on regulatory regimes as a consequence of the financial crisis. However, collateralization does not come for free. In this study, we analyze the capital needs for margining based on commodity prices of 2007-2009 in conjunction with the clearing rules for margining of the European Commodity Clearing AG (ECC). We apply different hedging scenarios to state-of-the-art coal- and gas-fired power plants, and the sale of outright power in the German market. Based on the set-up of our analysis, we show that in absolute terms especially outright power has quite significant cash needs for trading, whereas coaland gas-fired power plants have less than half the needs of outright power. In relative terms for the fossil-fired power plants, we find that coal-fired power plants have a relative advantage in comparison to gas-fired plants. The need for risk capital per MWhth of coal-fired power plants is comparably lower. A major reason for this is the standard notation of coal in US-$ per ton: As one ton of coal contains approx. 7 MWh of thermal energy (which is the relevant unit for the calculation of the fuel consumption), the price change for coal in US-$ (or €) per MWh is only approximately one seventh compared to the notation in metric tons. This translates into comparably lower margining needs for the fuel variation margin of a coal-fired power plant vs. a gas-fired power plant, offering a variety of further research questions.
    Keywords: Credit risk mitigation; margining; collateralization; risk capital; power plant valuation; portfolio optimization
    JEL: G12 G32 L94 O16
    Date: 2010–02
  41. By: Guido Sandleris
    Abstract: During sovereign debt crises, even after controlling for the decline in relevant macroeconomic variables, both foreign and domestic credit to the private sector decline. This paper presents a mechanism through which sovereign defaults can lead to this decline, even if domestic agents do not hold government debt. The mechanism highlights the interaction between sovereign defaults, domestic credit market institutions and firms’ collateral constraints. In developing countries firms are usually collateral constrained. In a model with endogenous sovereign debt, a sovereign default, through its effect on expectations about fundamentals, affects the value of the firms’ international and domestic collateral, which limits the availability of foreign and domestic credit. The model also shows that, by attracting private capital flows to the private sector, stronger domestic financial institutions reduce governments’ incentives to default, which, in turn, facilitate public borrowing.
    Date: 2010
  42. By: Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: Financial institutions are increasingly linked internationally and engaged in cross-border operations. As a result, financial crises and potential bail-outs by governments have important international implications. Extending Allen and Gale (2000) we provide a model of international contagion allowing for bank bail-outs financed by distortionary taxes. In the sequential game between governments, there are inefficiencies due to spillovers, free-riding and limited burden-sharing. When countries are of equal size, an increase in cross-border deposit holdings improves, in general, the non-cooperative outcome. For efficient crisis managment, ex-ante fiscal burden sharing is essential as ex-post contracts between governments do not achieve the same global welfare.
    Keywords: bail-out, contagion, financial crisis, international institutional arrangements
    JEL: F36 F42 G28
    Date: 2010
  43. By: Nadezhda Malysheva; John R. Walter
    Abstract: Legislative and regulatory actions taken in response to the financial turmoil which occurred between 2007 and 2009 expanded the extent to which financial institution liabilities were protected by federal government guarantees: i.e., these actions expanded the federal financial safety net. How large has the safety net become? Walter and Weinberg (2002) measured and examined the size of the safety net as it stood in 1999. We estimate the size of the safety net as of the end of 2008, after the creation of a number of government programs meant to back financial liabilities. We use methods similar to those employed by Walter and Weinberg and find that the safety net has expanded significantly. We briefly describe our results and provide a table detailing them.
    Date: 2010
  44. By: Randall Morck; Fan Yang
    Abstract: The remote inland province of Shanxi was late Qing dynasty China’s paramount banking center. Its remoteness and China’s almost complete isolation from foreign influence at the time lead historians to posit a Chinese invention of modern banking. However, Shanxi merchants ran a tea trade north into Siberia, travelled to Moscow and St. Petersburg, and may well have observed Western banking there. Nonetheless, the Shanxi banks were unique. Their dual class shares let owners vote only on insiders’ retention and compensation every three or four years. Insiders shares had the same dividend plus votes in meetings advising the general manager on lending or other business decisions, and were swapped upon death or retirement for a third inheritable non-voting equity class, dead shares, with a fixed expiry date. Augmented by contracts permitting the enslavement of insiders’ wives and children, and their relative’s services as hostages, these governance mechanisms prevented insider fraud and propelled the banks to empire-wide dominance. Modern civil libertarians might question some of these governance innovations, but others provide lessons to modern corporations, regulators, and lawmakers.
    JEL: G21 G3 N2 N25 O16
    Date: 2010–04
  45. By: Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority); Hans Genberg (Research Department, Hong Kong Monetary Authority); Tsz-Kin Chung (Research Department, Hong Kong Monetary Authority)
    Abstract: Significant deviations from covered interest parity were observed during the financial crisis of 2007-2009. This paper finds that before the failure of Lehman Brothers the market-wide funding liquidity risk was the main determinant of these deviations in terms of the premiums on swap-implied US dollar interest rates for the euro, British pound, Hong Kong dollar, Japanese yen, Singapore dollar and Swiss Franc. This suggests that the deviations can be explained by the existence and nature of liquidity constraints. After the Lehman default, both counterparty risk and funding liquidity risk in the European economies were the significant determinants of the positive deviations, while the tightened liquidity condition in the US dollar was the main driving factor of the negative deviations in the Hong Kong, Japan and Singapore markets. Federal Reserve Swap lines with other central banks eased the liquidity pressure and reduced the positive deviations in the European economies.
    Keywords: Sub-prime crisis, funding liquidity, covered interest parity, FX swaps
    JEL: F31 F32 F33
    Date: 2009–07
  46. By: Sylvia Kaufmann; Johann Scharler
    Abstract: If firms borrow working capital to finance production, then nominal interest rates have a direct influence on inflation dynamics, which appears to be the case empirically. However, interest rates may only partly mirror the cost of working capital. In this paper we explore the role of bank lending standards as a potential additional cost source and evaluate their empirical importance in explaining inflation dynamics in the US and in the euro area.
    Keywords: New Keynesian Phillips Curve, Cost Channel, Bank Lending Standards, Bayesian Analysis
    JEL: E40 E50
    Date: 2009–10
  47. By: Filippo Occhino; Andrea Pescatori
    Abstract: We study the macroeconomic implications of the debt overhang distortion. The probability that a firm will default acts like a tax that discourages its current investment. This is because the marginal return of the firm's investment will be seized by its creditors in the event of default, so the higher the firm's probability of default, the lower its expected marginal return of investment. The dynamics of this distortion, which moves counter-cyclically, amplify and propagate the effects of productivity, volatility, wealth redistribution and government spending shocks. Both the size and the persistence of these effects are quantitatively important, and the fiscal multiplier is large and hump-shaped. The model replicates important features of the joint dynamics of macro variables and credit risk variables, like default rates, recovery rates and credit spreads.
    Keywords: Corporations - Finance ; Debt ; Business cycles ; Risk
    Date: 2010

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